Tax Freedom Day — The Feeling of Not So Much Freedom

By Mike Klein

Mike Klein, Editor, Georgia Public Policy Forum

There is this idea out there that the country has a tax code.   Actually, it has a tax obstacle course.  It is almost impossible to decipher the obstacle course with its many minefields and politicians constantly argue about how to “simplify” it.  That is why the annual dust-up between the Tax Foundation and the Center on Budget and Policy Priorities is a fascinating spat.

Each year the Foundation announces Tax Freedom Day – the date on which it says we have worked long enough to pay federal, state and local taxes.  This year the Foundation says freedom will arrive next Monday in Georgia and one week later nationally, on Monday, April 17.  Are you feeling better?

The theory is that we will work for ourselves the remainder of the year because collectively we will have earned enough to pay our fair share — $2.62 trillion for federal taxes and $1.42 trillion for state and local taxes.  Every year the Center on Budget and Policy Priorities debunks the report because it does not like the analysis method. This has become an annual ritual and both organizations talk about each other on their websites.

Monday, April 17 is also when 2011 federal and state returns must be filed unless you receive an extension.  First quarter payments for next year federal and state taxes are due the same day so perhaps a lot of folks won’t be feeling like they have Tax Freedom!

Freedom this year is calculated on an “average” American paying 29.2 percent in federal, local and state taxes.   Here’s where the Tax Foundation and the Center disagree about what the numbers mean.  The Center says the Foundation overstates middle class tax levels and it says states with the highest wage earners are penalized in the formula.  The Foundation’s position is that the highly progressive federal tax code creates the result because high wage earners are paying more real tax dollars than low wage earners.

Georgia has a low percentage of the nation’s highest wage earners.  The Tax Foundation ranked the state 35th nationally.  Last year tax freedom arrived in Georgia on April 3, so the state slipped by one week in new rankings, and our overall position changed by two spots from 37th last year.  When it recently wrote about Georgia’s 2012 tax reform legislation, the Tax Foundation favored changes that will impact business-to-business transactions, but it said the plan to collect online sales tax is unconstitutional and the Foundation described the reinstated sales tax holidays as a gimmick.

Southern states with their lower comparative personal incomes rank low.  North Carolina (31) placed ahead of Georgia but Alabama (43), South Carolina (47) and Tennessee (50) trailed.  Connecticut is ranked first (tax freedom on May 5) followed by New York and New Jersey tied for second (tax freedom on May 1).  Those three states have higher percentages of the most affluent wage earners so their residents are paying lots of taxes.

The Tax Foundation and the Center on Budget and Policy Priorities are caught in a data argument that they seem likely to continue in a sporting fashion.  The deep level economic arguments on both sides are fairly fascinating stuff that you can examine in depth on their websites … click here for the Tax Foundation and click here for the Center on Budget and Policy.

Methods aside, the real message is the undeniable impact of government expansion and taxation on individuals.  The Tax Foundation says Americans will spend more dollars on federal, state and local taxes this year than on food, clothing and housing combined.  When you consider that about half of all Americans pay no federal income taxes, those who do pay taxes are paying a lot, their fair share and someone else’s fair share, too.

The Tax Foundation anticipates that state income taxes will eat up 40 working days for the average American, the equivalent of eight working weeks.  That figure is slightly skewed because millions of Americans who live in seven states including Florida and Tennessee pay no state income taxes.  Georgia has a 6 percent maximum income tax rate that funds about half of the state budget.

The report estimates you will work eleven days to pay your share of corporate income taxes because business taxes flow downhill to consumers. It will take 24 working days – almost five weeks – to pay for Social Security, Medicare and other social programs, 15 days for sales and excise taxes, 12 days for property taxes and seven days for various miscellaneous taxes.

Tax Freedom Day was first calculated in 1948 by a Florida businessman who later deeded his formula to the Tax Foundation when he retired in 1971.  Data has been analyzed going backward to 1900 when the tax freedom date was January 22.   Tax freedom moved in sync with dramatic events such as both World Wars, the expansion of federal government social programs in the 1960’s and the Vietnam War in the 1970’s.  The latest date was May 1, 2000, during the final year of President Bill Clinton’s eight-year administration.

Federal stimulus spending, tax cuts, large numbers of laid off workers, and workers earning low wages resulted in an early tax freedom date on April 1, 2009.   But the growing canyon between federal revenue and spending has changed the game again.  This will be the fourth consecutive year in which Washington will borrow at least $1 trillion.  The Tax Foundation said tax freedom this year would not be reached until May 14 if federal deficit borrowing was included in the calculation.

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